Investment volumes will meet or exceed 2024 levels, potentially reaching £50 billion, and property returns will reach double digits, but the approach to investing in commercial real estate will undergo a profound shift, reports Colliers in its annual forecasts.
The adviser says investors are moving beyond traditional prime assets to focus on value-add opportunities, sustainability and flexible space. As a result, UK commercial property returns are expected to reach double digits at 11% in 2025, supported by this "changing mindset".
Colliers' 2025 predictions report identifies what it sees as the key trends in occupier demand, investment strategy and the changing role of buildings in an increasingly hybrid world.
It says the economy will stabilise in 2025, with interest rates expected to fall to 3.75% by the end of the year, supporting stronger transactional activity. It says economic growth will primarily be driven by government consumption and investment, while household spending may remain constrained due to mortgage pressures and the ongoing cost-of-living challenges.
“A profound transformation of outlooks and expectations is already evident across UK commercial property markets,” said Walter Boettcher, head of research and economics at Colliers in a statement. “While the ESG agenda and technology continue to drive change, we are also witnessing generationally driven perceptual shifts in consumption and work/life patterns. These are impacting all logistical, retail, leisure and workplace platforms. How businesses use space has shifted fundamentally. Investors' mindsets are changing accordingly but the new period of tighter global finance is also changing approaches to achieving investment returns. This shift is reshaping not just individual sectors but the entire market landscape creating fresh opportunities for those ready and well-placed to adapt.”
Investor sentiment is set to improve in 2025, with capital market activity forecast to strengthen in the second half as interest rates stabilise. Transaction volumes are expected to reach £45 billion to £50 billion, with investors focusing on value-add opportunities, ESG-compliant refurbishments and higher-yielding assets. Colliers is forecasting yield compression as gilt yields stabilise, supporting stronger returns.
“The days of relying solely on standing investments are over,” said John Knowles, head of national capital markets at Colliers. “In 2025, the focus will be on uncovering value through refurbishment, sustainable upgrades, and alternative assets with strong income potential.”
Debt and advisory
The debt landscape will improve in 2025 as the Bank of England reduces interest rates, possibly to somewhere around the low 400s by year-end, Colliers suggests. Refinancing demand is set to increase as borrowers seek to restructure debt in response to falling rates. It says lending will remain selective, with lenders prioritising prime assets and properties that are ESG-compliant or have a "roadmap to achieving high sustainability targets".
“While we expect to see improved debt conditions, access will remain selective and the market polarised. Borrowers with high-quality assets, strong track records and clear sustainability credentials will have the advantage,” said Laurence Richardson, director, debt advisory at Colliers.
Offices following path to flexibility and sustainability
A growing demand for flexible leasing solutions and ESG-compliant spaces is key in the office market. Regional cities like Leeds are expected to see Grade A rents exceed £45 per square foot, driven by increased demand for high-quality, sustainable buildings. It says businesses are no longer simply seeking square footage but prioritising flexibility and sustainability.
“The integration of flexible leasing models and sustainability requirements will drive significant change in the office market, creating opportunities for innovative landlords and developers,” said Mike Hawkins, head of national offices at Colliers.
Industrial and logistics seeing changing demand pattern
The industrial and logistics sector is seeing steady demand, with take-up of large units approaching pre-COVID averages, Colliers says. But the paradigm shift is visible in the reduction of speculative development, shifting the focus to locations with high demand and limited supply. This is leading to a UK average rental growth of 3.5% to 5.5%.
“As speculative development slows, the resilience of demand for prime locations will continue to support rental growth and attract investor interest,” said Len Rosso, head of industrial and logistics at Colliers.
Retail facing changing world
There is increasing competition for prime space in the retail sector in shopping centres, high streets and out-of-town locations with particular expansion by supermarkets. The limited availability of retail stock continues to push up prime rents, with the "ongoing importance of physical retail shopping as a leisure experience reflected in footfall numbers".
“Retailers are competing for limited space, which is driving rental growth and underlining the continued value of bricks-and-mortar retail,” said David Fox, head of retail at Colliers.
Business rates continue to hit retailers
Changes to business rates in the recent Budget will significantly hit larger properties with rateable values over £500,000. Retailers operating flagship stores and large high-street units are expected to face higher operating costs, adding further pressure on profitability. Calls for reform of the business rates system are unlikely to quieten down in 2025, Colliers says.
“The increase in the business rates multiplier will place significant cost pressures on retailers, especially those with larger, high-profile stores. Many retailers are now reassessing their store portfolios to balance operational costs with growth ambitions,” said John Webber, head of business rates at Colliers.
Residential resilience
The housing market has remained resilient, with house prices set to achieve 3% growth in 2024. Looking ahead, house prices are forecast to rise by 3% to 4% next year, supported by improving consumer confidence as households adjust to the reality of higher borrowing costs.
“The lynchpin for expanding the UK’s housing stock is the planning system. Delays and costs in the planning system might suggest that delays and costs in planning system reforms should be expected,” said Andrew White, head of residential at Colliers.
Living will shift towards refurbishment and growth
Colliers is forecasting that refurbishment of ageing student housing and build-to-rent properties will surge, driven by ongoing demand for high-quality rental accommodation in core cities. This shift reflects a new focus on retrofitting existing buildings to meet modern standards, rather than just new developments, it adds.
“The need for high-quality rental accommodation continues to grow, and refurbishment strategies will play a key role in meeting demand in 2025,” said Lee Layton, head of living capital markets research at Colliers.
Sustainability and ESG becomes essential
Sustainability and ESG considerations are now at the forefront of all development and investment strategies, Colliers says. It adds that the shift towards net-zero carbon goals is accelerating, and by 2025 this will be a fundamental expectation rather than a consideration. This paradigm shift will drive new developments and retrofits in the coming year, it says.
“ESG is no longer just a priority – it is a necessity. Meeting net-zero goals will require collaboration and innovation across the property lifecycle,” said Matt Sal, head of ESG at Colliers.
Hotels sees lack of development and rising revenues
The hotel sector is feeling the effects of what Colliers says is the market’s "paradigm shift", with limited development activity due to high costs and constrained debt availability. Demand is growing though, and operational revenues are expected to rise as supply remains static.
“While new supply is constrained, rising revenues will create opportunities for well-positioned hotel operators in the coming year,” said Marc Finney, head of hotel and resort consulting at Colliers.
Alternative sectors
Operational real estate, including healthcare and leisure, is experiencing a shift towards long-term investment, driven by their resilience and transparency, Colliers says. Rising operating costs are creating challenges, but the sectors remain attractive for those looking for stable returns.
“Alternative sectors offer long-term security, but addressing rising operating costs will be critical to unlocking value,” said James Shorthouse, head of alternative markets at Colliers.
Boettcher says the predictions report highlights a year where resilience and innovation will define success in the UK commercial property market.
"The challenges of recent years have laid the groundwork for a reimagined industry – one where creative investment strategies, bold occupier decisions, and the ability to adapt to evolving demands will set the pace. As we look ahead, collaboration across sectors will be essential to unlocking value and creating sustainable growth for the future.”